Law Talks Episode: Executors buying out beneficiaries in an estate property

Robyn:  Welcome to another edition of 4CRB’s Law Talks and today we have joining us Attwood Marshall Lawyers Wills and Estates Partner, Angela Harry. Thanks for joining us, Angela. 

Angela: Robyn, thanks for having me. 

Robyn: Angela, the family home in a lot of cases is the main asset which most people leave when they die. Today, we are going to be talking about the legal steps which need to be considered if an executor wants to purchase the estate property.

These sorts of transactions are considered high risk legally. And, Angela, you will explain why solicitors acting for executors need to understand the rule against self-dealing and what executors can and cannot do. But before we dive into the complexities, let’s start by explaining to our listeners, what is the role of an executor in a will?

Angela: So, an executor of a will is responsible for managing and distributing a deceased person’s estate according to the terms of their will. So, this includes tasks such as organising the funeral, applying for probates when required, calling in the estate assets and paying off any liabilities, and then distributing the estate to the beneficiaries as per the terms of the will.

The executor in their role really has a fiduciary duty to act in the best interests of the estate and its beneficiaries. 

Robyn: And can an executor purchase the estate property, which they are carrying out their duties? And if not, why? 

Angela: Executors have a duty to act in good faith and must not deal with trust property for their own benefit or otherwise profit from the trust, so from the estate.

So, an example of this is what we call the purchase rule or the self-dealing rule, which basically prohibits executors and administrators, their associates from purchasing estate property, even if it’s for profit of value, except as authorized by the terms of the will or by the court or with the consent of the beneficiary.

Robyn: Okay.  So, what complications can arise from an executor attempting to purchase the property? 

Angela: Oh, look, we can have all sorts of complications that can arise in a scenario like this. These can include, firstly, placing themselves in a position of conflict. So, the executor’s dual role as a trustee, and then as a prospective purchaser can lead to a conflict because where their personal interests, which if they’re wanting to purchase the property, normally involves endeavouring to acquire it at the lowest possible price, might be overshadowed by their duties to the estate, which when selling a property is to get the highest price.

So, one of the first complications is that conflict that can arise.

Another one is the disputes that can occur with beneficiaries. And again, this really goes back to price. I’ve seen many estates where a dispute has arisen between an executor and the beneficiaries, and it’s often over what purchase price the executor wants to acquire the estate property for.

So, in most instances, the biggest disagreement we’re seeing is arguments over well, what is that property worth?  Is the executor taking a benefit they shouldn’t? And there’s, there’s a real conflict there that can arise. 

Robyn: And can you give us examples of recent cases you’ve noted or perhaps been involved with which concern such issues and their outcomes?

Angela: Oh, look, I’ve, um, I notice this is coming up more and more in the last, I don’t know, probably five or ten years in my experience and, what’s happening is, I think executors want to purchase properties for a variety of reasons. Sometimes and probably the most common reason is there’s that sentimental attachment.

But often it can be because it represents a good investment. The executor in most cases is usually one of the beneficiaries as well. So, they’re often looking at it going, all right, well, I’m going to inherit part of that property, they can usually get a reduction in stamp duty where there’s an appropriation.

So, I’m seeing it as executors often have, I guess, a lead into the property market, a good investment, you know, there’s that sentimental attachment, which all rolls into, all right, I think I, um, I want to purchase this property so I’m going to do that. 

Robyn: Yeah. So, what would your key takeaways for our listeners be, um, about executors desiring to purchase estate property?

Angela: Look, I think it’s really going back to some of the basics when you’re looking at, alright, what is the role of an executor? And I mentioned the role against self-dealing before, and it’s really steeped in law. Um, there’s cases that go back to the early 1900s and I think that’s a good quote from a judgment, there’s one case from 1911 and the executor, in that case, with the agreement of his co-executor, wanted to purchase an estate property at auction, and the judge said, look, there could be no doubt that the executor placed himself in a position where his interests conflicted with his duty.

As a vendor, his duty was to obtain the highest price attainable, whilst as purchaser, his interest would lead him to endeavour to purchase at the lowest possible price. So in assuming that dual role of vendor and purchaser, the executor in that case really disregarded the most important rule, which is complying with his fiduciary duties.

So, I guess, you know, you said, what are some of the takeaways? Probably some of the takeaways, and this might lead back, even when the person is, people are doing their wills, having discussions within families about, you know, is there an intent, does someone in the family want to purchase estate property?

And if they do, structure that into the will, you know, give the will-maker the opportunity to have discussions with the family before and put in a mechanism for sale, you know, how do they value it? What’s the timing for them to do that? So, when executives, you know, want to undertake such a task, they’ve already got a mechanism within the will to do so.

Robyn: Yeah, and I think, as you say, understanding the legality of the executor’s rights in purchasing property is essential to fulfilling the duties effectively. As you said and protecting the interests of the estate and the beneficiaries.

Angela: And that’s where that balance comes, and I think what I often observe is executors often don’t realize that they’re wearing two hats when it’s particularly an executor and a beneficiary.

And executors have to be really careful that they’re not putting themselves in a position of conflict. So, what we normally do when we have scenarios like this, we often have to send executors to go and get their own independent advice in their personal capacity. And we really have to make sure that they’re maintaining transparency with beneficiaries.

So if they are wanting to purchase an estate property or if there is some form of mechanism in the will, they really have to have the beneficiaries involved, get their consent and make sure that they’re complying with their fiduciary duties as an executor, so they’re not exposing themselves to risk of, you know, any sort of claims that beneficiaries might make that, you know, they’re preferring their interests over those of the beneficiaries in the will.

Robyn: Yeah, and I know we say it time and time again on this program, Angela, but by seeking professional legal advice you can ensure that you are following the guidelines and the requirements, to navigate the buying process and ensure that it’s a smooth and legally compliant transaction,

Angela: Absolutely. 

Robyn: Thanks for your time today, Angela.

Angela: My pleasure. Thanks for having me.

Robyn: You’ve been listening to Law Talks here on 4CRB, which you can hear every Friday morning from 9 o’clock.